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It was another mixed start for European equities this morning as investors processed last night’s turnaround on Wall Street. The Dow and S&P500 gave up gains from earlier in the session and ended modestly lower. The energy sector was the main loser yesterday as oil prices first rallied but then sold off sharply after the Energy Information Administration released its latest report on US inventories. There was a bigger than expected crude drawdown but this was more than offset by a large build in distillate stockpiles.

The Bank of England (BoE) will announce its latest rate decision at midday. This will be the BoE’s first meeting since early August when its Monetary Policy Committee (MPC) voted unanimously to cut the headline Bank Rate by 25 basis points to 0.25%. It also announced a Term Funding Scheme (TFS) to reinforce the pass-through of the rate cut, expanded its Asset Purchase Facility by £60 billion and said it would buy up to £10 billion of UK corporate bonds. Governor Mark Carney and his colleagues faced a barrage of criticism following these moves as many policymakers and commentators felt the Bank had acted precipitously. Such criticism was validated to an extent after the latest surveys for Manufacturing, Services and Construction PMIs showed a strong rebound in August. There is consequently very little chance that the Bank will make any changes to monetary policy after this meeting.

So the release of US Retail Sales for August could end up being the more significant event on today’s calendar. While this isn’t the last important data release ahead of Wednesday’s rate statement (we have CPI and Consumer Sentiment tomorrow), a weak reading could help convince investors that the FOMC won’t risk hiking US rates when it meets next week. Core Retail Sales (excluding autos) is expected to rise 0.3% from the previous month. This would represent a sharp rebound from July’s disappointing decline of 0.3%.

The FTSE 100 ended the day 7.7 points higher at 6,673.3

The German DAX fell 8.2 points or 0.08% to end the day at 10,378.4

The US30 closed down 32 points to finish at 18,034.8 The S&P 500 fell 0.06% to close at 2,125.8 while the Nasdaq 100 rose 0.5% to close at 4,746.1

Equities

Monsanto (MON) has agreed to an improved takeover offer from Bayer (BAYN) which values the US seed company and GM pioneer at around $66 billion. Monsanto accepted $128 per share, which is an improvement on Bayer’s initial offer made back in May of $122. Assuming it now goes ahead, the deal will be the largest all-cash offer in history and the biggest-ever involving a German buyer. It would also mean that the combined operation will control around 25% of the world’s market for seeds and pesticides. Bayer has also agreed to a $2B break-up fee should the deal fail to get regulatory clearance. There’s been criticism of the tie-up from Bayer’s shareholders who worry that the price is too rich and that Bayer may now neglect its core pharmaceutical business. Analysts have pointed out that Bayer may have panicked into the takeover following other deals in the sector, including ChemChina’s acquisition of Syngenta and the Dow Chemicals-Du Pont merger.

Commodities Update

Crude oil rallied in early trade yesterday following the latest inventory update from the American Petroleum Institute (API) which came out after the Tuesday’s close. The release showed a smaller-than-expected build in stockpiles. Crude stocks rose by 1.4 million barrels for the week ending 9th September which was less than the 3.8 million expected. However, oil started to slip back into negative territory as the trading session progressed. Investors and speculators remain spooked by a report earlier in the week from the International Energy Agency (IEA). This showed that, contrary to earlier forecasts, there was evidence of a sharp slowdown in global oil demand growth. The IEA downgraded its prediction for demand growth for this year by 100,000 barrels to 1.3 million barrels per day (bpd). It also said that it expects any fall in non-OPEC production to be offset by increased OPEC output – specifically Saudi Arabia, Iraq and Iran. It is also worth remembering that the US shale oil rig count has increased for the tenth successive week, suggesting that US output (non-OPEC) could also be picking up.

Later yesterday oil suddenly spiked higher after the influential Energy Information Administration (EIA) released its own US inventory data for last week. This showed a crude drawdown of 600,000 barrels against an expected build of 2.8 million. However, the rally was short-lived and it wasn’t long before the oil price reversed direction once again and hit its lowest level since the beginning of the month. Looking beneath the report’s headline showed a distillate build of 4.6 million barrels (the biggest in eight months) and a gasoline build of 567,000 barrels (against an expected drawdown of 1.1 million barrels) which was the biggest in two months.

Gold and silver spent most of yesterday’s morning session modestly higher. This was despite a slight upside bias to the US dollar in early trade which in normal circumstances would weigh on the two precious metals. However, these aren’t normal times, although the two precious metals spiked higher later in the session as the US dollar suddenly lurched lower.

The summer is finally over and trading desks are fully manned once again. At the same time, investors have to confront a pile of uncertainties which are all causing some nervousness. First up are next week’s rate decisions from the US Federal Reserve and Bank of Japan. Following this we have the US Presidential Election. As far as the Fed is concerned, investors have had to deal with a series of conflicting messages from the US central bank. Given this, and taking into account the low probability assigned to a September rate rise, the Fed will cause complete market turmoil if they decide to hike rates next week. As far as the Bank of Japan (BOJ) is concerned, the messages from here are also very confusing. However, if the BOJ holds back from easing monetary policy further, then we can expect the USDJPY top retest 100 in short order. Meanwhile, speculation over Hillary Clinton’s health has helped to boost Donald Trump’s poll lead ahead of the November election.

The last few days trading have seen a surge in stock market volatility, a corresponding sell-off in equities and a sharp rise in bond yields. Investors are trimming back their exposure to the riskiest of assets and seeking out safer harbours which include the US dollar and precious metals. The fact that gold and silver have held up relatively well despite swings in the greenback is a good illustration of investor nervousness.

Forex Update

Speculation over the possibility of a rate hike at next week’s meeting of the US Federal Reserve has been the dominant market issue even before Janet Yellen’s speech at Jackson Hole at the end of August. However, yesterday some of the focus turned towards the Bank of Japan (BOJ) which will hold its own rate setting meeting next week. This followed a Japanese news report that the BOJ is planning to make negative interest rates the centre-piece of future monetary easing. This is because the BOJ is concerned that it is at or near to the limits of its asset purchase programme. The Japanese central bank is desperate to weaken the yen in order to kick-start growth and boost inflation. However, investors haven’t forgotten what happened when the BOJ shocked markets by adopting negative interest rates at the end of January this year. Back then the yen rallied on the news, and it was probably this reaction which has made the BOJ nervous of easing monetary policy further.

But traders are wary of responding too aggressively to comments from Japanese central bankers and policymakers ahead of the actual BOJ statement. It’s worth remembering that BOJ governor Haruhiko Kuroda said the bank had no intention of adopting negative interest rates little more than a week before they were formally announced. The BOJ could still expand its Quantitative and Qualitative Easing programme after next week’s meeting. But another possibility is that it holds back from making any changes to monetary policy. If that were the case, then we can expect the USDJPY to head back towards 100, particularly if the US Federal Reserve decides not to hike rates after Wednesday’s meeting.

Upcoming events

Today’s significant economic events include rate decisions from the Bank of England and Swiss National Bank, UK Retail Sales and Euro zone CPI. From the US we have Retail Sales, PPI, the Philly Fed Manufacturing Index, Weekly Jobless Claims, Current Account, Empire State Manufacturing Index, Capacity Utilisation, Industrial Production and Business Inventories.

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